Argentina’s Senate approved two key economic reform bills early Thursday with modifications, delivering a boon for the right-wing government of President Javier Milei and potentially unleashing large investments.
The reform bills — one a sweeping deregulation of the economy and the other for fiscal austerity — passed after nearly 22 hours of heated debate that could have gone either way for Milei.
In the end, after several clashes outside Congress between protestors and the police, senators voted 36 to 36 for the deregulation bill, known as the Bases Law, forcing Vice President Victoria Villarruel to break the tie with her affirmative nod early on Thursday. The fiscal reform passed with 37 to 35 in favor a few hours later.
The two bills were approved by the Chamber of Deputies on April 30 and will now return to the lower house because of changes introduced in the Senate. These include changes to income and wealth taxes, and scrapping the proposed privatizations of the flagship airline, Aerolíneas Argentinas, the national post office and a state broadcaster.
While watered-down from their original versions, the bills still call for a massive deregulation of the economy and a simplification of the tax system to help balance the budget, including by privatizing some other state companies, promoting large investments, holding a tax amnesty.
One of Milei’s main goals — and a campaign promise — is to slash public spending to take the primary fiscal account to a 2% of GDP surplus this year from a 5% deficit in 2023.
WHAT’S NEXT?
Guillermo Francos, who took over as the president’s chief of cabinet on May 28, said Thursday on Radio Mitre that he expects the lower house to approve the original versions of the bills that they passed in April, excluding the changes made in the upper house. But overall, he called the approval by the upper house “a massive triumph,” adding that some of the excluded proposals, like privatizing Aerolíneas Argentinas, will be sought through new bills.
“It is true that this law does not solve all of Argentina’s problems, but it is a tool that will allow us to advance on many pending issues,” Francos said.
It’s also the latest in a string of wins for the right-wing administration, including the renewal on Wednesday of a $5 billion currency swap with China until July 2026 that has reduced near-term debt repayment pressures.
“In six months, we got Argentina out of default, hyperinflation and all the dangers that were waiting to be unleashed in Argentina,” Francos said.
MARKET REACTION
Oxford Economics, a consultancy, said in a report that while it expects Argentine markets to respond strongly to the president’s legislative victory, in its view “the fiscal package won’t bring significant upside to fiscal consolidation.”
“Milei is counting on a favorable tax regime to attract asset regularization, similar to what [President] Macri did in 2016. History makes us skeptical about its success in boosting reserves or revenue,” the report said.
Nevertheless, Thursday’s votes marked the first congressional win for Milei, who took office in December as a political novice.
Juan Cruz Díaz, a managing director of Cefeidas Group, an international advisory firm in Buenos Aires, said getting the bill approved was hard work for the administration, but also a learning experience for a team with little experience, bar a few ministers such as Francos.
In the negotiations with lawmakers, Milei, an eccentric and fiery economist, built on his popularity stemming from last year’s sweeping election. But in the end, his administration learned how to compromise and work with the opposition and governors to get the bills this far, Díaz told LatinFinance.
‘POLITICAL POLARIZATION’
“All the branches of the state worked in an intense process with a lot of changes and a very vehement president during a deep economic and political crisis and a big political polarization of society,” Díaz said.
Milei, however, has so far achieved few successes in the real economy. Inflation may be coming down from nearly 290% annual — the highest in the world — but poverty and unemployment are rising and the economy is forecast to contract 3.8% this year.
The president has maintained his popularity throughout this but with the looming approval of his two key reforms, he will soon have to start implementing his projects.
Díaz said that while many companies will now consider new projects, in particular in the energy and mining sectors, there are still hurdles for a wider investment push. The biggest obstacle is the capital controls, which Milei has been hesitant to lift until the central bank’s reserves increase by some $15 billion.
At the same time, Milei will have to show some results in the real economy to sustain his popularity, Díaz said.
“There is a degree of patience so far because nobody is putting the responsibility on the president for the economic crisis, but as time goes by, he is not going to have the excuse that Congress didn’t give him the tools,” he added. “Now he has the tools and his ministers, and so he is going to have to deliver. This will be the true measure of success.”